Peter Mansfield - Investec Australia Limited - An update on the infrastructure project finance landscape in Australia


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Peter Mansfield delivered the presentation at the 2014 Future of Infrastructure Conference.

The Future of Infrastructure forum explored state and national challenges which impact the long term economic growth and future of infrastructure development in Australia at this time. It also addressed the latest proposals for changes within Australia's infrastructure.

For more information about the event, please visit:

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Peter Mansfield - Investec Australia Limited - An update on the infrastructure project finance landscape in Australia

  1. 1. Strictly confidential Out of the Ordinary ® Peter Mansfield, Head of Infrastructure Finance & Investment 20 August 2014 Infrastructure Finance in Australia An Update on the Project Finance Landscape
  2. 2. Introduction There are some signs of changes in the funding mix 2 • The funding mix for infrastructure projects has varied greatly over time in Australia and varies across international jurisdictions. • Some of the sources and instruments currently available or emerging in Australia include: - Bank debt - Institutional Debt - Capital Markets instruments - Alternatives (ECA finance, subordinated debt, credit enhancement) • Investec has been involved in infrastructure financing as a lender, advisor and developer across utilities, transport and PPP projects with exposure to senior and sub debt, capital markets issues, ECA finance and credit enhancement. Our credentials include: - Lending to Royal Adelaide Hospital PPP (senior) and Queensland Schools PPP (sub); - Advising on financing for Perth Airport (including wrapped bond issuance) and the Surat Basin Rail; - Developing the Collgar Wind Farm (ECA financed) and Gold Coast Hospital Car Park (institutionally debt financed) Sources of PPP Financing in Australia Source: Infrastructure Australia: Review of Infrastructure Debt Capital Market Financing
  3. 3. Bank Debt Senior Finance Still the dominant source of debt finance 3 • The banks still dominate the infrastructure finance landscape • Bank liquidity has increased significantly over the last year with more banks active in the market and taking larger holds • Although some European banks have pulled out of Australia since the GFC , many more Asian and Canadian banks have come in • Who is active? - The Australian banks (ANZ, NAB, Westpac, CBA) are still very dominant and willing to take large holds - The large Japanese banks are also very active (SMBC, BTMU, Mizuho) in the bigger transactions as are the Canadians (CIBC, Scotia Bank) - Other active banks include HSBC, ING, Credit Agricole, OCBC - There are a number of other foreign banks who are more sporadic and have less of a presence in Australia – more likely to lend only to relationship clients or participate in smaller amounts on syndication - Investment banks do play a part (eg RBC, Citigroup) but mainly where they have an equity procuring or advisory role • Even with institutions coming into the lending landscape there is still likely to be a need for banks. Although some institutions have built up internal resources (eg IFM), many are more passive portfolio and would still look to banks for: - Credit analysis resources - Appetite for or understanding of greenfield risks - Appetite for being involved in competitive bids and ability for meeting bid timetables - Ability to enter into swaps - Management of progressive drawdowns and deal monitoring
  4. 4. Bank Debt Senior Finance Terms and pricing becoming more favorable for borrowers 4 • Despite the large number of greenfield transactions, privatisations and refinancings in the market, there is still more debt capacity than there is borrower demand which is driving more aggressive debt terms • Project finance margins have reduced in line with general lending spreads to below 2% for operating infrastructure assets (eg Port of Newcastle 1.50% 3 year, 1.80% 5 year) compared to 3-3.5% during the GFC (eg Aquasure) • Tenors have remained sticky at around 3-5 years with mini-perm structures still predominant (this is a very Australian feature but Basel III rules discourage this from changing) • Ticket sizes have increased substantially with $150-200m holds common with the big banks and a willingness to go to $500m in special circumstances (or even >$1,000m for mega LNG projects) • Gearing levels have increased and generally terms have loosened • Underwriting being talked about but not happening too much
  5. 5. Institutional Senior Debt Finance The sleeping giant is awakening – but slowly 5 • Globally there has been a strong push for institutional investment in infrastructure debt. In Canada it is the norm but has been limited in Australia. • Several government reviews internationally and in Australia have looked at was this can be better facilitated. • Drivers: - Institutions understand the infrastructure asset class having been equity investors for a long time - Institutions underlying liability profile (ie tenor) matches infrastructure better than bank funding - It provides a good risk-adjusted return - It is a good diversification with little correlation to other asset classes • Constraints - Liquidity requirements of defined contribution pension funds - Often doesn’t fall into the fixed income portfolio manager’s benchmark particularly if not investment grade (or unrated) - Alternative investments portfolio managers often find the return too low - Lack of credit analysis resources - With high margins borrowers have not fully appreciated refinancing risk (this could now be changing) - Currently biggest constraint has been wall of bank liquidity • To date institutional financing has been coming in to syndicated bank debt facilities (eg IFM in Royal Adelaide Hospital, Connect East) and opportunistic • There is now a host of fund managers focussing on getting institutional debt into infrastructure including established general fund managers (AMP, Hastings, Challenger), institution-owned managers (IFM, Super Investment Management) and boutique fund managers (Westbourne, Rearden Capital, Infradebt, Infrastructure Capital Group) looking at both senior and higher-yield debt in Australia and internationally.
  6. 6. Capital Markets Financing Increasing availability but more in the corporate space 6 • Australian MTN - The Australian medium term note market is modest by international standards but growing. Infrastructure issuance has been limited to more corporate-style financing of operating businesses (rather than project finance) – ie lower gearing, non-amortising, often as part of a broader funding mix. These issues have all been rated and investment grade and generally 3-7 years. - Issuers include Brisbane Airport, Sydney Airport, ETSA, SP Ausnet, Transurban. • US 144A - The US private placement market is a much deeper market and offers similar tenors and rating requirements but potentially better pricing in US$. - For A$ businesses the currency risk needs to be managed - Issuers include similar Brisbane Airport, DBCT, Melbourne Airport, ElectraNet • US TLB - The US “Term Loan B” market is a higher yield debt market - Accessed more by resources and leverage d corporates - Issuers include Alinta Energy • Bespoke OTC Instruments - There have been bespoke bond instruments from time to time including a FIIG Securities issue secured over the equity in a portfolio of Plenary PPP projects
  7. 7. Alternative Financing Structures Horses for courses 7 • Export Credit Finance - ECA finance has been a substantial contributor in the resources space (eg LNG projects, Roy Hill) to help meet the very large volumes and this has carried over to some large resources-related infrastructure (eg coal ports) - Involvement in true infrastructure has been more limited although Canadian EdC have been quite active in PPPs and Danish EKF have been active in wind power • Subordinated Debt Finance - Have seen some sub debt in PPP projects (eg BTMU, Investec), more in utilities and transaport - Potential cost of capital gap with base rates coming down faster than equity IRRs - Ability for developers to minimise dilution during the yield compression stage - Some of the government structures open up opportunity for sub debt – eg Southeast Queensland Schools Supported Debt model, delayed Government capital contribution models • Credit Enhancement Structures - Pre GFC, long-term monoline-wrapped bond financing was the major funding source for infrastructure projects. Post 2008 with the demise of the monoline insurers this market has disappeared. - One of the few remaining monolines (Assured Guaranty – AA rated) has recently closed the first post-GFC PPP/PFI wrapped bond financing in the UK but we haven’t seen signs of a broad revival yet. Demand for this product for structured securitisations has dried up and it is not clear how the institutional market now view the creditworthiness of long-term credit enhancement. - Both in Australia and Europe there have been reviews into how credit enhancement can aid institutional investment (eg EIB support models)
  8. 8. Conclusions 8 • Currently banks still dominate infrastructure project finance but there is an emerging institutional and capital markets capacity • Longer term there seems to be a strong imperative for institutional and capital market instruments to supplant banks for a significant proportion of longer term debt although progress has been slow • It seems that there will always be a place for banks in the more intensive stage of projects (bidding, construction, ramp-up) • Initially institutional investment looks more likely to come through a bond refinancing post bid and post construction or through specialist managers. • Alterative structures are more likely to respond to opportunities created my changing circumstances in financial markets or government funding mechanisms.
  9. 9. Questions? 9